Is the AGL Energy (ASX:AGL) share price a value trap?

Value traps can be sneaky, so what do we need to consider for AGL Energy?

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

As the AGL Energy Limited (ASX: AGL) share price slips further to the downside on Monday, some investors might be wondering if it is a cheap company that will keep getting cheaper.

Now trading for $5.65 at market close, the electricity generating and retailing company has evaporated 55.55% of its share price from this time a year ago. Even worse, shares in AGL Energy have tumbled 71.41% over the past 5 years, signifying value destruction en masse.

To put the underperformance into context — $10,000 invested in the S&P/ASX 200 Index (ASX: XJO) 5 years ago would now be worth ~$14,233 before dividends. Meanwhile, the same amount invested into AGL Energy would now be worth a disappointing ~$2,859 before dividends. That means an ASX investor would have been nearly 5 times better off in the Aussie index than in AGL shares by this time.

At present, AGL could be considered 'cheap' based on some valuation metrics. This poses the question, is the AGL share price a value trap waiting to leave its mark on another bunch of unsuspecting value investors. Or, is the company set to stage a comeback.

An orange sign with the word value against a blue cityscape, representing ASX value shares

Image source: Getty Images

Sometimes you get what you pay for

Typically, a lot of the metrics used for assessing 'value' are rear-facing. Whether it be a 12-month trailing price-to-earnings (P/E) ratio, price-to-book ratio, debt-to-equity ratio, or net tangible assets.

These financial tools are heavily weighted towards the road already travelled, not so much the road ahead. The danger hidden within this is the potential for the road ahead to be filled with even more potholes than experienced prior.

For example, AGL Energy's P/E ratio of ~10 at the end of June 2020 might have looked appealing. Especially when compared to the utilities industry average of nearly 20. Yet, now the AGL share price is far lower and has a negative P/E ratio due to its current unprofitability.

While there are often companies ripe for a contrarian approach, sometimes you get what you pay for. Often a company will be donning a low P/E ratio as a result of its less than appealing future outlook. In some cases, this unattractive future is exactly what plays out, pushing the share price lower.

What about the AGL Energy share price?

This brings us to the question: is the AGL Energy share price a value trap? It has appeared to be a prime example in recent years. However, to label it as a trap for future investors is not possible. Mostly because only time will reveal the answer.

Currently, the company is struggling through a loss-making period, a high debt-to-equity ratio, and a renewable shift that is putting the pinch on energy margins. The AGL Energy share price will be dependent on how the business structurally performs from here.

If profits resume and dividends are increased, then it will be shown it was a value trap no more. Whereas, if the company is unable to turn things around, the value trap could be on full display.

Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Energy Shares

An oil refinery worker stands in front of an oil rig with his arms crossed and a smile on his face.
Energy Shares

New ratings on 4 ASX 200 energy shares: experts

Leading brokers have recently updated their ratings and 12-month share price targets.

Read more »

Oil worker giving a thumbs up in an oil field.
Energy Shares

Which emerging ASX gas producer could deliver almost 80% gains?

This NT-focused gas company has a big year ahead of it.

Read more »

Black barrels of oil in ascending and then descending sizes with a red arrow pointing down to indicate a falling oil price.
Energy Shares

Why are ASX 200 energy shares tumbling today?

The Brent Crude oil price slipped below US$100 per barrel today.

Read more »

A rueful woman tucks into a sweet pie as she contemplates a decision with regret.
Energy Shares

Why is this ASX 300 energy share crashing 42% on Wednesday?

Investors are pummelling the ASX energy share on Wednesday. But why?

Read more »

Excited couple celebrating success while looking at smartphone.
Broker Notes

Up 222% in a year, why this ASX energy share is forecast to more than double your money again

A leading broker forecasts more outsized gains to come from this rocketing ASX energy share. But why?

Read more »

Young ASX share investor excitedly throwing hands up in front of savings jar.
Energy Shares

$7,500 invested in New Hope shares 5 weeks ago is now worth…

Strong coal prices lift New Hope shares over a five week period.

Read more »

Image of a fist holding two yellow lightning bolts against a red backdrop.
Energy Shares

Oil slides below US$100 as tensions shift, ASX energy stocks pull back

Oil prices pull back as supply concerns ease.

Read more »

A woman sits on a chair with laptop on her lap and a smile on her face with a graphic image of a climbing jagged arrow tangled around her feet and lifting it comfortably so it is raised against a backdrop of many lightbulbs with one large lightbulb showing a dollar sign.
Energy Shares

This ASX stock is up 2,700% in a year. Here's what's driving the dip today

Sunrise shares slip despite a massive 2,700% surge over past year.

Read more »